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Ja  09-20M 


Michigan  Banking  Law 

AND 

DESIRABLE  AMENDMENTS, 

By  Hon.  T.  C.  Sherwood, 

Commissioner  of  the 

State  Banking  Department  of  Michigan. 


ADDRESS 

Delivered  beeore  the  Michigan  Bankers’  Association  Convention,  held  at 
Detroit,  August  9111,  ioth  and  iith,  1S92. 


Mr.  President  and  Gentlemen  of  the  Convention — The  Program  Com- 
mittee, notwithstanding  my  protest,  have  assigned  me  this  subject, 
“ Michigan  Banking  Law,  and  Desirable  Amendments,”  claiming  that 
the  position  I occupy  enables  me  to  study  the  working  of  our  State 
law,  ascertain  its  weak  places,  and  suggest  remedies. 

But  right  here  is  where  the  committee  are  in  error,  for  the  more  I 
study  the  operation  of  Finance,  the  less  I am  inclined  to  advise  as  to 
the  best  methods  to  adopt  in  conducting  its  operations. 

The  more  I study  the  State  Banking  Law,  and  witness  its  effect 
upon  the  banks  in  different  localities  of  the  State,  the  fewer  amend- 
ments would  I suggest. 

The  more  I investigate  the  systems  adopted  by  many  of  the 
banks  in  the  State,  and  become  acquainted  with  the  officers  of  these 
institutions,  the  greater  my  embarrassment  in  standing  here  attempt- 
ing to  advise  those  whose  opinions  as  to  the  needs  of  a Banking  Law 
are  of  more  practical  value  than  any  I may  express. 

To  write  a good  article  on  any  subject,  a person  must  know  next 
to  nothing  of  the  question  under  discussion.  Then  he  is  not  ham- 
pered by  prejudice,  facts,  or  figures,  and  can  give  full  play  to  his 
imagination. 

I know  just  enough  about  banking  to  make  me  careful  in  the 
advice  I give  and  the  suggestions  I make  in  regard  to  our  Banking 
Law  and  necessary  amendments.  I would  be  a dull  scholar  indeed, 


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if  in  the  past  four  years  I had  not  learned  much  in  studying  the  law, 
witnessing  its  operations  in  different  parts  of  the  State,  its  effects 
upon  the  business  interests  of  the  country,  and  by  coming  in  contact 
with  the  large  number  of  Michigan  bankers,  among  whom  are  found 
the  brightest  financiers  of  the  country. 

Yet,  if  my  experience  is  of  value,  if  the  knowledge  of  the  require- 
ments of  a Banking  Law  obtained  by  actual  observation  will  be  of 
benefit  to  this  Association,  I most  cheerfully  impart  it. 

We  are  all  scholars  in  the  school  of  finance,  and  he  only  deceives 
himself  and  works  mischief  and  injury  to  others,  who  thinks  he  has 
already  mastered  the  science,  and  there  is  nothing  further  for  him  to 
learn. 

Business  principles  and  methods  are  continually  undergoing 
changes.  The  financial  systems  of  forty  years  ago  are  obsolete  now, 
and  the  financier  of  to-day  must  be  an  attentive  student  if  he  keeps 
up  with  the  procession  in  the  race  for  success. 

No  person  can  in  this  age  of  the  world  successfully  engage  in  a 
business  or  a profession  unless  he  has  a certain  amount  of  confidence 
in  his  fellow  men;  neither  can  he  succeed  unless  the  public  have  con- 
fidence in  his  ability  and  faith  in  his  integrity. 

Law  is  a controlling  regulation,  which  has  for  its  object  the  build- 
ing up  of  confidence  in  one  another’s  integrity  by  visiting  penalties 
upon  those  who  violate  its  provisions  or  disregard  its  authority. 

As  there  is  no  class  of  business  transacted  to-day  which  is  built 
up  and  operated  so  exclusively  on  faith  and  confidence  in  the  honesty 
and  integrity  of  others  as  the  banking  business,  it  is  necessary  that 
our  Banking  Laws  be  such  as  will  inspire  confidence,  which  is  the 
basis  or  foundation  of  material  prosperity. 

Faith  in  humanity  is  a necessary  concomitant  in  banking.  I care 
not  how  wealthy  a man  may  be,  he  cannot  succeed  as  a banker  if  he 
treats  his  customers  as  though  they  were  dishonest,  or  is  himself  sus- 
pected by  the  public  of  being  deceitful  and  treacherous. 

Integrity  begets  confidence,  and  he  who  trusts  no  one  is  himself 
unworthy  of  credit  or  confidence. 

In  proof  of  the  assertion  that  confidence  is  necessary  in  a banking 
business,  I need  only  refer  to  the  “wildcat”  banking  of  Michigan, 
made  possible  by  the  Banking  Law  of  1837,  which  the  older  mem- 
bers of  this  Association  so  well  remember. 

By  the  systematic  fraud  practiced  by  the  bankers  of  that  day,  the 
very  system  became  a reproach. 

The  President  and  Cashier  were  looked  upon  as  little  better  than 


3 


confidence  men,  and  the  sign  “Bank”  upon  the  window  or  door  was 
as  significant  to  the  average  business  man  as  was  the  inscription  over 
the  cave  in  Dante’s  Inferno,  “Who  enters  here  leaves  hope  behind.” 

It  was  not  until  the  State  bank  circulation  was  taxed  out  of  exist- 
ence, and  the  establishment  of  the  National  banking  system,  that 
confidence  was  restored. 

With  National  supervision  and  inspection  our  banking  system  was 
raised  to  a higher  standard  of  excellence  and  usefulness  than  any 
system  had  ever  attained  before,  and  we  stood  before  the  nations  of 
the  world  with  the  grandest  and  most  complete  banking  system  ever 
known. 

In  Michigan  to-day  the  bank  means  something  more  than  “ Shy- 
lock’s  office,”  a place  to  borrow  money,  or  barter  stocks  and  bonds. 
It  is  now  regarded  as  synonymous  with  honest  dealing  and  mutual 
benefit,  and  is  used  as  the  depository  for  the  surplus  money  of  our 
citizens,  who,  as  laborers,  have  not  the  time  to  make  investments,  or 
by  business  men  who,  for  convenience,  use  the  facilities  offered  by 
the  bank  for  the  transaction  of  commercial  business. 

Confidence  once  lost  is  not  easily  regained,  as  many  corporations 
and  individuals  can  testify.  Therefore  it  is  necessary  that  whatever 
Banking  Law  is  adopted,  or  amendment  made,  it  should  have  for  its 
object  the  strengthening  of  public  confidence  in  the  system  and  faith 
in  the  wisdom  of  its  administration. 

With  this  end  in  view,  the  framers  of  Michigan’s  Banking  Law 
copied  largely  from  the  National  law,  which  for  thirty  years  has  with- 
stood criticism  and  inspired  confidence. 

In  place  of  the  Comptroller  of  the  Currency,  as  in  the  National 
Banking  Law,  our  State  law  provides  for  the  appointment  of  a Com- 
missioner of  the  Banking  Department,  whose  duty  it  is  to  authorize 
the  incorporation  of  banks,  ascertain  if  the  required  amount  of  capi- 
tal is  actually  paid  in,  and  if  the  business  is  transacted  in  accordance 
with  law;  call  for  reports  from  the  several  banks  on  passed  days 
unknown  to  the  bank  officers,  cause  these  reports  to  be  published  for 
the  benefit  of  depositors  and  the  general  public,  verify  their  correct- 
ness by  a personal  examination  by  examiners  appointed  by  him,  and 
exercise  a general  supervision  over  the  banks  incorporated  under 
State  law. 

All  these  powers  are  substantially  those  conferred  upon  the 
Comptroller  of  the  Currency,  and  have  a tendency  to  inspire  confi- 
dence in  the  stability  and  permanency  of  our  State  system. 

That  portion  of  the  National  law  which  provides  for  the  issue  of 


bank  circulation,  was  wisely  omitted  by  the  framers  of  Michigan  law, 
as  Sections  32  and  62  expressly  prohibit  the  issuing  of  any  bill,  note 
or  certificate  intended  to  circulate  as  money. 

Michigan  business  men  are  satisfied  with  the  experience  they 
have  had  with  State  circulation,  and  this  generation  at  least  will 
refrain  from  adopting  any  amendment  to  our  State  Banking  Law 
permitting  banks  to  issue  any  note  or  bill  intended  to  circulate  as 
money.  No  doubt  there  are  many  bankers  who  would  be  pleased  if 
State  banks  were  allowed  to  issue  circulation,  as  there  is  money  in  it 
for  the  banker. 

In  the  old  days  of  State  circulation,  the  un current  money  depart- 
ment of  many  of  the  banks  was  the  best  paying  department  of  the 
institution. 

The  sufferers  were  the  traveling  public,  the  small  dealers,  and  the 
laboring  class,  and  not  the  banks  which  issued  the  currency,  or  the 
individuals  whose  business  it  was  to  exchange  the  notes  which  passed 
current  in  one  State  but  not  in  another. 

Our  Banking  Law  differs  from  the  National  Act  in  that  it  is  a 
dual  law.  It  not  only  provides  for  the  transaction  of  a commercial 
business,  but  takes  in  a wider  range,  and  includes  a savings  department 
for  the  surplus  money  not  needed  in  actual  commercial  transactions. 

And  right  here  is  where  very  many  of  the  older  commercial  bank- 
ers of  the  State  antagonize  our  State  system.  They  see  no  necessity 
for  savings  banks.  They  cannot  understand  why  business  should  not 
be  transacted  to-day  as  it  was  thirty  years  ago.  They  paid  no  inter- 
est on  deposits  then,  why  should  they  now  ? 

The  reason  that  the  Savings  Bank  exists  is  because  of  the  changed 
condition  of  business  affairs.  Thirty  years  ago  we  were  engaged  in 
a civil  war.  Every  dollar  of  money  in  circulation  was  needed  to  fur- 
nish army  supplies,  move  crops,  and  transact  the  business  of  the 
country.  We  had  no  surplus  money.  Every  dollar  was  in  actual, 
active  use.  If  it  was  deposited  in  banks,  it  remained  there  but  a 
short  time,  and  then  only  for  the  convenience  of  the  depositor. 

When  the  war  was  over,  and  business  resumed  its  normal  condi- 
tion, the  country  found  itself  supplied  with  a great  number  of  banks. 
The  facilities  for  transacting  the  commercial  business  of  the  country 
by  checks,  drafts,  and  bills  of  exchange,  was  greater  than  ever  before. 
Commercial  banks  were  so  loaded  down  with  deposits  in  excess  of 
the  demands  for  commercial  and  accommodation  loans,  that  they 
gave  but  little  or  no  encouragement  to  the  small  depositor,  who  was 


crowded  out  and  compelled  to  keep  his  money  in  his  house  or  loan  it 
to  his  neighbor. 

This  arrangement  did  not  work  satisfactorily  to  either  the  neigh- 
bor borrowing  or  the  person  making  the  loan,  as  the  borrower  had 
rather  negotiate  a time  loan  at  a bank  where  the  accommodation  is 
mutual  and  the  transaction  in  a measure  private,  and  the  depositor 
had  rather  deposit  his  money  where  a division  of  the  profits  is  made 
in  the  interest  paid. 

So  you  see  that  the  Savings  Bank  is  necessary.  It  is  not  the  pro- 
duct of  avarice  or  greed,  but  rather  a public  benefaction  born  of 
necessity.  From  a small  beginning  it  has  become  a power  and  con- 
venience in  financial  circles;  and,  gentlemen,  the  Savings  Bank  has 
come  to  stay.  The  public  demands  its  existence.  The  farmer  and 
laborer  appreciate  its  value,  and  are  satisfied  with  the  Banking  Law 
which  seeks  to  protect  their  interests. 

Of  all  the  mutual  benefit  associations  in  existence  to-day,  the  Sav- 
ings Bank  is  the  most  beneficent,  especially  if  security  is  taken  into 
consideration. 

When  a bank  pays  four  per  cent  on  savings  deposits,  and  loans  its 
money  at  six  per  cent,  the  division  of  profits  is  unequally  in  favor  of 
the  depositor;  but  this  is  a rule  of  banking,  and  not  a requirement 
of  law,  and  will  correct  itself. 

I have  been  inclined  to  the  belief  that  in  our  large  cities  banks 
should  not  transact  both  a savings  and  commercial  business;  yet  four 
years’  experience  has  not  witnessed  any  bad  results,  and  it  may  be 
that  the  two  classes  can  be  operated  as  successfully  under  one  man- 
agement in  cities,  as  I am  satisfied  they  will  continue  to  do  in  small 
towns  and  villages,  in  manufacturing  and  farming  communities, where 
two  separate  institutions  could  not  profitably  exist. 

It  is  not  necessary  that  I take  the  time  that  could  more  profitably 
be  used  in  discussing  other  subjects,  in  pointing  out  the  good  features 
of  the  Michigan  Banking  Law. 

Copied  as  the  commercial  department  is,  from  the  National  Bank- 
ing Act,  which  in  turn  was  copied  from  the  State  Banking  Law  of 
New  York,  it  retains  all  the  good  measures  of  that  law  and  adopts 
many  others,  which,  with  the  savings  department,  make  it  peculiarly 
adaptable  to  our  State  and  the  times  in  which  we  live. 

The  savings  department  embodied  in  Michigan’s  Banking  Law 
was  modeled  after  the  New  York  Savings  Law,  with  this  notable 
exception,  the  New  York  Savings  Banks  are  not  capitalized;  they  are 
simnlv  mutual  or  charitable  institutions,  whose  directors  serve 


6 


without  pay;  while  our  Savings  Banks  are  incorporated,  with  a paid 
up  capital,  and  the  stockholders  are  liable  to  the  depositors  for  the 
amount  of  their  stock,  in  addition  to  the  said  stock. 

This  feature  guarantees  the  depositor  a greater  degree  of  watch- 
fulness and  care  on  the  part  of  the  directors  in  making  investments, 
as  a stockholder  will  be  more  interested  in,  and  will  give  more  of  his 
time  and  attention  to  the  bank  in  which  he  has  invested  his  money, 
than  he  would  if  he  was  simply  a trustee  of  the  funds  of  another; 
and  competition  will  secure  to  the  depositor  as  high  a rate  of  interest 
as  is  paid  the  depositor  in  the  New  York  Savings  Bank. 

That  Michigan’s  dual  law  is  adaptable  to  the  business  of  our  State 
is  evidenced  by  the  fact  that  fifty-nine  banks  have  incorporated  under 
its  provisions  during  the  three  and  one-half  years  of  its  existence. 

That  the  people  are  satisfied  with  its  security  is  proven  by  the 
fact  that  on  the  12th  day  of  July  last,  they  had  on  deposit  in  banks 
incorporated  under  Michigan’s  Banking  Law,  $61,984,886.14,  which  is 
over  $23,000,000  more  on  deposit  than  when  the  law  went  into  effect, 
January  7,  1889. 

These  facts,  when  fully  comprehended,  speak  more  eloquently  the 
praise  of  Michigan’s  Banking  Law  than  any  words  of  commendation 
I may  utter,  and  I therefore  leave  this  part  of  the  subject  and  take 
up  that  which  relates  to  “Necessary  Amendments.” 

What  are  necessary  amendments,  is  a question  difficult  to  decide, 
especially  as  we  have  such  a variety  of  interests  represented  in  dif- 
ferent parts  of  the  State,  and  where  there  exists  such  a diversity  of 
opinion  as  to  the  best  methods  necessary  to  accomplish  the  same 
result. 

As  you  are  aware,  I have  during  the  past  four  years,  refrained 
from  urging  or  suggesting  any  radical  change  in  our  Banking  Law, 
first,  because  of  the  injurious  effect  upon  business  interests  which  the 
continued  agitation  of  financial  measures  produce;  and  secondly,  the 
belief  that  a thorough  trial  of  the  law  should  be  had  before  amend- 
ments are  advocated  or  adopted. 

There  is  not  a thinking,  conservative  banker  in  the  State  that  has 
not  for  the  past  twenty  years  had  a feeling  of  anxiety  during  each 
session  of  the  Legislature,  fearing  that  some  “crank,”  for  political 
effect,  would  introduce  and  have  adopted  some  measure  that  would 
disturb  our  finances,  overturn  existing  relations,  or  create  distrust 
in  our  financial  institutions.  Of  course  it  would  be  done  in  the  inter- 
est of  the  dear  people,  for  whom  they  profess  a sincere  regard,  espe- 
cially about  election  time.  Nearly  every  financial  panic  this  country 


7 


has  experienced  has  had  its  origin  in  the  unnecessary  agitation  of 
financial  matters  by  men  who  have  had  but  little  practical  knowledge 
of  the  measures  advocated.  Like  children  playing  with  fire,  so  infat- 
uated with  the  brightness  of  the  illumination,  they  fail  to  realize 
until  too  late  the  awful  effect  of  the  conflagration  caused  by  their 
indiscretion.  Many  a business  failure  can  be  charged  directly  to  the 
United  States  Congress,  where  kindergarten  financiers  advocate  their 
visionary  schemes. 

We  all  know  there  is  just  as  large  a volume  of  money  in  existence 
during  a panic  as  there  is  in  the  most  flourishing  times;  but  unneces- 
sary agitation  of  financial  matters  cause  conservative  bankers  to 
strengthen  their  reserve  fund,  which  takes  just  so  much  money  from 
business  channels.  This  causes  a stringency  in  the  money  market. 
Every  banker  in  the  country,  for  self-protection,  not  only  refuses  to 
make  loans,  but  calls  in  those  already  made.  Money  accumulates  in 
bank  vaults,  or*  remains  in  the  possession  of  individuals.  Business 
becomes  paralyzed,  and  a panic,  with  its  train  of  calamities  and  suf- 
fering, is  the  result,  and  all  brought  about  by  an  attempt  to  improve 
that  which  needed  nt>  radical  improvement.  “ Rather  bear  those  ills 
we  have  than  fly  to  others  that  we  know  not  of,”  is  just  as  appli- 
cable in  questions  of  finance  as  the  one  originally  mentioned  by  , 
Shakespeare. 

For  these  reasons  it  is  no't  expedient  that  I at  this  time  suggest 
amendments  to  any  special  section  of  the  Banking  Law,  but  rather 
confine  myself  to  such  measures  as  will  in  my  judgment  make  more 
effective  Michigan’s  excellent  Banking  Law.  The  first  suggestion, 
and  the  one  I consider  of  the  most  importance,  is  the  granting  of 
more  power  to  the  Commissioner  of  the  Banking  Department. 

The  framers  of  Michigan’s  Banking  Law  were  fearful  that  if  too 
much  authority  was  vested  in  the  Commissioner,  he  might  use  it  to 
the  disadvantage  of  the  banks  under  his  supervision.  They  did  not 
consider  the  safety  of  the  depositor  so  much  as  they  did  their  own 
convenience  and  protection.  Being  honest  themselves,  they  did  not 
realize  that  others  might  be  dishonest ; consequently  they  could  not 
see  the  necessity  of  vesting  extraordinary  powers  in  one  individual, 
for  the  controlling  and  restraining  of  that  class  who  were  inclined  to 
be  dishonest.  They  therefore  withheld  the  authority  necessary  to 
make  effective  the  very  requirements  deemed  requisite  in  a general 
banking  law;  and  while  expecting  that  the  Commissioner  would  exe- 
cute the  law  in  the  interest  of  the  creditors  of  banking  corporations, 
they  really  left  the  power  in  the  hands  of  the  dishonest  bank  official, 


8 


or  made  its  procedure  so  circuitous  that  the  delinquent  had  ample 
time  to  accomplish  his  purpose. 

As  the  banking  law  becomes  more  and  more  popular,  a greater 
number  of  banks  will  incorporate  under  its  provisions,  and  it  would 
be  strange  indeed  if  among  the  number  there  are  mot  some  who  will 
organize  for  the  purpose  of  defrauding  their  customers.  Such  per- 
sons cannot  be  dealt  with  too  quickly  or  too  severely,  and  the  Com- 
missioner should  have  the  authority  to  take  immediate  possession  of 
such  bank,  and  then,  under  the  direction  of  the  *Court,  proceed  to 
wind  up  its  affairs. 

No  Commissioner  would  be  likely  to  abuse  the  j authority  vested 
in  him,  especially  if  he  was  an  experienced  banker,  and  certainly  no 
other  .should  be  appointed  to  so  important  a position.  I can  speak 
plainly  on  this  subject  without  being  accused  of  self-interest,  as  my 
term  of  office  is  nearly  ended.  j 4jp| 

I would  also  recommend  that  the  surplus  wljich^lhe  banks  are 
required  to  keep  be  increased  to  an  amount  cental  tq|one-third  or 
one-half  of  their  capital,  and  that  the  same  be  exempt  from  taxation. 
I am  thoroughly  impressed  with  the  importanc4R>f  h large  surplus 
account,  but  it  would  be  manifestly  unjust  to  require  a, .banking  asso- 
ciation to  diminish  the  amount  of  its  dividend  to  stockholders  in 
order  to  increase  the  surplus  account,  and  then  have  that  surplus 
subject  to  taxation,  especially  when  an  increased  surplus  account 
would  very  materially  add  to  the  security  of  depositors^ 

Another  measure  would  I suggest,  and  that  is,  to  have  more 
clearly  defined  the  law  governing  banks  transacting  simply  a com- 
mercial business. 

There  are  other  amendments,  of  less  importance  to  the  general 
public,  which  could  with  propriety  be  made  to  the  banking  law, 
which  are  well  known  to  many  of  our  bank  officers  ; but  it  is  to  be 
sincerely  hoped  that  no  material  change  will  be  made/^side  from 
strengthening  and  making  more  plain  the  law  that  ha§1  proved  so 
well  adapted  to  the  wants  of  the  public,  in  this  great  State  of  Mich- 
igan, of  which  we,  as  bankers,  are  so  justly  proud. 

I i 


